Safety and the Allocation of Costs in Large Accidents

Abstract

We study the characteristics of optimal levels of care and distribution of risk in a extended unilateral accident model, where 1/ parties are Rank Dependant Expected Utility maximizers, which allows us to capture two important behavioral characteristics in risk, both pessimism (probability transformation) and risk aversion; 2/ there exists an aggregate/uninsurable risk in case of accident ; 3/ tortfeasors have the opportunity to invest in damages reduction activities having a monetary cost of effort. Important results show that the optimal care is larger than under the risk neutral/small risks case, it depends on the aggregate wealth of society but does not depend on wealth distribution. We then examine whether ordinary liability rules, with or without insurance, can be used to implement the first-best outcome.